What’s going to happen to house prices now that interest rates are falling?

You’d have to be living under a rock not to now the Reserve Bank (RBA) cut rates by 0.5% this week. And most economists think there is likely to be another one or two more rate cut later in the year.

So what does this mean to the value of your home and for you and me as property investors? I’ll answer this by doing a Q&A…

First a bit of background

Earlier this year the RBA left interest rates on hold because they were expecting the mining boom to stimulate our economy. They were worried this may lead to inflation and thought they’d have to balance this stimulus out with higher rates.

However we’re in the middle of the mining boom, billions of dollars are flowing into our country building infrastructure, mining companies are making huge profits, a small group of skilled labourers are making massive wages, but in general the benefits haven’t trickled down into the economy.

If you think about it we’ve got a boom and doom economy – while the resources sector is booming, many other sectors of our economy are languishing.

What will the lower rates do to our property markets?

Of course the banks are not going to pass on the full rate cut, but to put things into perspective, each 0.5% cent drop in interest rates slices about $120 off the monthly interest cost of an average Australian mortgage. This means more money in our pockets.

Ultimately lower interest rates will be positive for our property markets, because it will boost confidence, however it may take some time for the rate cut to translate to an increase in property prices.

In the past once rates started falling and especially if there was a succession of interest rate cuts, our property markets would pick up. Established home sales would improve, new housing starts picked up and property values prices started to increase. This didn’t happen instantly. Often it would take 6 months or so for the effects to flow through

But over the last few years the connection between cheaper money and improving real estate markets has been broken. If you think about it, interest rates have fallen a few times over the last year, yet property values have languishing around Australia.

Why aren’t lower interest rates boosting the market?

While the property fundamentals are improving, confidence is holding back homeowners and property investors; but this seems to be slowly improving and falling interest rates will only help this.

What’s dampening investor confidence?

It’s a combination of 3 things:

Overseas economic issues,

Local political issues,

The mixed messages we’re receiving about our local property market.

Just open up the papers and you’ll see how much confusion there is about what’s happening to the property market. Some say it’s on the rebound, others say there’s worse to come and yet others say the markets are just flat.

More importantly it’s the global economic issues that are affecting the way the average Australian is thinking about property.

Remember we tend to think like investors, but our property markets are driven by ordinary Australians – mums and dads who are buying and selling their homes – their biggest asset. And today people are far more aware of what’s happening overseas in places like Europe and the US and this is weighing heavily on buyers’ and sellers’ minds.

They’re worrying about things like:

What if another financial meltdown occurred overseas? How would that affect me?

What if the China juggernaut stalls? What will that do to our resources boom and my job?

It’s these type of questions that are impacting consumer confidence and without confidence, the market won’t improve.

Right now, our property fundamentals are good: our economy is stable, unemployment is pretty much under control and interest rates are coming down.

In the past low interest rates, strong employment and a solid local economy would have been fundamental drivers that buoyed of property markets, but today, the instant news cycle of what’s happening overseas, is making overseas economic matters far more relevant.

When you add the uncertainty around interest rates before this last announcement and concerns about whether the banks will pass the rate cuts on, a lot of people simply don’t have the confidence they need to go ahead and buy or sell their homes or an investment property.

So what does the property market need to move forward?

I think we’ll need more than one or two interest rate cuts.

We really need some positive news come out of the US and Europe and for the news to remain positive for a while.

There are already some signals of recovery from the US and it looks like that Europe has got its problems under control; but it’s just not enough right now to raise people’s confidence to get into the property market and take on what they see the risk of the market falling further.

Are our markets still falling?

The property research houses have released a slew of contradictory property price data over the last week and they all have different interpretations of what’s happening in the property markets.

Similarly when you ask them what’s in store for our property markets their opinions vary. So it’s no wonder property investors are confused.

Why the contradictory results?

I’ve found we always get mixed messages as the property market moves form one stage of the cycle to the next.

It seems that we’ve moved out of the downturn stage of the property cycle and are now entering the stabilization phase of the property cycle when buyers are slowly returning. This is a time when property values remain flat for a while as buyer and seller gets into balance.

Of course to make things even more confusing, each state is made up of various property markets, some geographical and others at various price points, and each is at a different stage of its own property cycle.

So what should a property investor do?

With interest rates falling, market confidence returning and the property cycle moving on, it’s a good time to get set for the next stage of the property cycle.

It’s a great time to get independent advice about the state of your property portfolio and to understand what’s happening in your local market. It’s also a good time to see how much you can borrow now that interest rates are falling.

It’s also time to take action.

If you’d like a free review of your existing property portfolio, if you’d like to know how to get started in property investment or if you’d just like to attend a free property briefing to find out a bit more about what is happening in your local market and what our research suggests is in store for us, just click on this link to find out more and reserve your place.

Remember the multi award winning team at Metropole have no properties to sell, so their advice is independent and unbiased.

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Michael is a director of Metropole Property Strategists who help their clients grow, protect and pass on their wealth through independent, unbiased property advice and advocacy. He's once again been voted Australia's leading property investment adviser and his opinions are regularly featured in the media. Visit Metropole.com.au

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